NEW YORK (CNNfn) - A federal judge on Friday sentenced the executive officers of the defunct Oakford Corp. and four others for their roles in a scheme that allowed NYSE exchange floor brokers to trade illegally for themselves.
William Killeen, formerly Oakford’s president, received the harshest sentence.
U.S. District Judge Jed Rakoff sentenced Killeen, 39, to a 20-month prison term, three years of probation and a $50,000 fine.
Killeen, of Colts Neck, N.J., had pleaded guilty in May to one count each of securities conspiracy and tax evasion.
Another principal of the firm, Thomas Bock, of Garden City, N.Y., also pleaded guilty in the case and was sentenced to 18 months in prison, three years of probation and a $50,000 fine.
During the sentencing hearing in Manhattan federal court Killeen apologized for his behavior but broke down as he tried to read from a prepared statement and his lawyer finished reading it for him.
In sentencing Killeen, Rakoff noted the letters of support he had received on the defendant's behalf and his active community work, including coaching children's sports.
The judge said Kileen’s honorable dedication to his family and his community conflicted with his business life, in which he and others engaged in "a series of blatantly unlawful acts motivated by greed.”
In earlier entering their guilty pleas, both Killeen and Bock admitted allowing floor brokers to execute trades for their own benefit in Oakford accounts, acknowledging that they knew it was illegal. The floor brokers shared in their resulting profits with Killeen and Bock during the scheme that lasted from 1993 through 1998.
In addition to the securities charge, Killeen and Bock admitted defrauding the Internal Revenue Service by failing to report commissions they had "kicked back” to Oakford customers by paying clients' personal expenses, including beach club dues, credit card bills and apartment rents.
The two men also admitted failing to report funds they had diverted from Oakford for their own personal use, including vacations and mortgage payments.
A group of floor brokers, who had pleaded guilty to securities conspiracy for trading in Oakford accounts without customer orders, were also sentenced throughout the day. Defense lawyers urged the judge to be lenient, arguing that the defendants were unaware that their trades were illegal.
"These people did not know there was a potential of federal incarceration,” said Benjamin Brafman, one of the defense lawyers. "The exchange should post the rules clearly and unequivocally.”
The defendants and their sentences are as follows: Thomas Cavallino, six months home confinement, five years probation and a $100,000 fine; Ed Mueger, three months in prison, three months home confinement, three years probation and a $15,000 fine; and John and Mark Savarese, four months in prison, two months home confinement and a $15,000 fine each.
Floor brokers are barred, except under limited exceptions, from trading for their personal benefit because they have an unfair advantage. The scenario is similar to insider trading, in which brokers often hear of large block trades and other transactions before the information reaches the public.
They are allowed only to buy or sell stocks on behalf of customers who pay them a commission for the service. Independent brokers, like those charged in this case, take orders from brokerage firms who do not handle the trades themselves.
In an opinion last month, Rakoff blasted the NYSE for failing to properly supervise independent floor brokers or adequately enforce its own rules on discretionary trading.
Rakoff also said testimony given by the Big Board's top regulatory official, Edward Kwalwasser, at an evidentiary hearing in October indicated that the NYSE's interpretation of its rules "makes a mockery of the ordinary meaning of 'discretion' and creates a convenient escape from ... meaningful enforcement.”
Another floor broker, John D’Alessio, who was arrested in connection with the Oakford case but had charges against him dropped, last month sued the NYSE, accusing the exchange and its officers of conspiring to violate federal securities laws.
D’Alessio, who is suing for injurious falsehood, willful and negligent misrepresentation and breach of contract, is seeking $22.25 million in damages.
-- from staff and wire reports